The Two Year Rule When It Comes to Acquisition Offers

After reading about yesterday’s proposed acquisition of RelateIQ, and the speculation that the purchase price was in the range of 100x run-rate, it reminded me a piece of advice I received when we were considering selling Pardot:

If you executed perfectly for the next two years, how much would the business be worth under normal market conditions? If you don’t want to sell, but would sell for an aggressive price, make it for what you think the business will be worth in two years.

At Pardot, we had about $10 million in trailing months revenue at time of acquisition. Based on our growth rate, not taking in outside capital, and our guess as to market conditions, we felt we could be at roughly $25 million in trailing twelve months revenue in two years. A normal Software-as-a-Service company, depending on a number of factors, is often worth 3-6x revenue. So, take $25 million in trailing twelve months revenue in 24 months and a 4x revenue multiple and you get $100 million. When the negotiated offer finally got to that price range we knew it was time to sell.

What else? What are your thoughts on the two year rule when it comes to considering acquisition offers?

2 thoughts on “The Two Year Rule When It Comes to Acquisition Offers

  1. Appreciate your insights on this. Is it wrong to start a company with the intent to sell it. I typically have 36 months of intense drive on any one project and then I want something new. What is your optimal time frame from start to exit. Tech changes so fast – 36 months can be an eternity.

  2. Some people are better at getting things off the ground while others are better at growing them and still others are better at managing mature growth. In addition, you may have several other venture ideas that can benefit the world. Sometimes moving on is best. But how do you know when you are giving your ‘baby’ to the right person? I would be more interested in knowing if Pardot was sold solely based on price or if the buyer was a factor. Thanks for the great post!

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.